If a company establishes that its per unit standard for its product is 3 kilograms of direct materials at $2 per kilogram, when you are calculating the materials price variance, do you use $2 as your standard price, or $6, as the unit standard was given as 3 kilograms.
My original take was to use the $6, but further reseach suggests that it is the per/pound amount that is used. I am not sure why this is the case if the standard given was 3 kilograms, but that is what the literature is leaning towards. Clarification is please requested.
The formula I am using is (actual - standard) x quantity purchased. Obviously, the answer varies quite a bit if the wrong value is used.
Thank you,
Parrot

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Originally Posted by ParrotBird48516

If a company establishes that its per unit standard for its product is 3 kilograms of direct materials at $2 per kilogram, when you are calculating the materials price variance, do you use $2 as your standard price, or $6, as the unit standard was given as 3 kilograms.
My original take was to use the $6, but further reseach suggests that it is the per/pound amount that is used. I am not sure why this is the case if the standard given was 3 kilograms, but that is what the literature is leaning towards. Clarification is please requested.
The formula I am using is (actual - standard) x quantity purchased. Obviously, the answer varies quite a bit if the wrong value is used.
Thank you,
Parrot

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Hi

When you establish a standard it is usual to express it in terms of the lowest denominator. As the weight is expressed in Kg then in this case that is 1 Kg so the standard cost of materials is in fact $6 but the standard price for the material is $2 per Kg.

This is done so a price variation can be calculated as well as a volume variation for the materials used